UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 15884 / September 17, 1998
Accounting and Auditing Enforcement
Release No. 1077 / September 17, 1998
Securities and Exchange Commission v. Thomas F. Casey,
1:98CV02214(TFH) (D.D.C.) (September 17, 1998)
SEC SUES CHAIRMAN AND CEO
OF AUDRE RECOGNITION SYSTEMS, INC.
Civil Injunctive Action Alleges That Thomas F. Casey
Ordered Fraudulent Nondisclosures, Directed False Recordkeeping,
and Made False Statements to Auditors
The Securities and Exchange Commission filed a civil injunctive
action in the federal district court for the District of Columbia
alleging that Thomas F. Casey, the chairman and CEO of Audre
Recognition Systems, Inc., ordered fraudulent nondisclosures in
Audre's filings with the Commission, directed the falsification
of corporate records, and made materially false statements to
Audre's auditors in 1993 and 1994. Audre, based in San Diego,
California, develops and markets document-conversion software.
Fraudulent Nondisclosures
In August 1993, according to the complaint, Casey took an
undisclosed $908,000 personal loan from Audre to pay off a margin
call on his personal holdings of Audre stock. The complaint
alleges that, despite the materially large size of the loan,
Casey directed Audre's executive vice president and its senior
accountant to withhold disclosure of the loan from Audre's
internal records and periodic reports with the Commission.
Accordingly, Audre's Form 10-Q filings for the quarters ended
October 1993 and January 1994 and its Form 10-K filing for the
year ended April 1994 failed to disclose the loan, the complaint
alleges.
According to the complaint, Casey reviewed and signed the Forms
10-Q and the Form 10-K knowing that those filings failed properly
to disclose the loan as a related-party transaction and that they
contained financial statements that were not prepared in
conformity with generally accepted accounting principles (GAAP).
The complaint also alleges that in 1994 Casey caused Audre to
file with the Commission a Form S-1 registration statement that
included the false and misleading quarterly and year-end
financial statements.
False Recordkeeping
According to the complaint, Audre's financial statements, which
were included in the Forms 10-K, 10-Q, and S-1 filings,
improperly accounted for the loan in Audre's cash and cash
equivalents account. The complaint also alleges that Casey
deliberately caused the loan to be improperly recorded as an
"investment" on Audre's books and records.
False Statements to Auditors
According to the complaint, Casey directed his staff not to
disclose the loan to Audre's auditors during the 1994 year-end
audit. The complaint alleges that Casey, along with the
executive vice president and the senior accountant, signed a
representation letter in 1994 that falsely stated that all loans
had been properly recorded or disclosed in Audre's financial
statements.
The complaint states that Casey repaid the loan in April 1994,
before Audre's April 30 fiscal year-end. The complaint also
states that Audre eventually disclosed the loan and its repayment
in a June 1995 amendment to the 1994 Form 10-K.
After the 1995 disclosure of the loan, according to the
complaint, Casey directed the vice president and senior
accountant to conceal from the auditors the true circumstances
surrounding Audre's earlier failures to make disclosure. Indeed,
the complaint alleges that Casey directed the executive vice
president and the senior accountant to assert that a
"miscommunication" had caused the transaction to be improperly
recorded as an investment on Audre's books and records.
Pending Settlement
The Commission's complaint seeks an order enjoining Casey from
further violations of Section 17(a) of the Securities Act,
Sections 10(b) and 13(b)(5) of the Exchange Act, and Rules 10b-5,
13b2-1, and 13b2-2, as well as the imposition of civil monetary
penalties. Without admitting or denying the allegations in the
Commission's complaint, Casey has agreed to a settlement whereby
he would be fully enjoined by an order of the court but would not
pay civil monetary penalties in view of his demonstrated
financial inability to pay.
Related Administrative Proceeding
The Commission has also instituted an administrative proceeding
against Beverly E. Johnston, Audre's former executive vice
president, Nick R. Avila, Audre's former senior accountant, and
Audre in connection with this matter. Without admitting or
denying the Commission's findings, Johnston, Avila, and Audre
have consented to an order compelling them to cease and desist
from committing or causing violations of the antifraud,
recordkeeping, and other provisions of the federal securities
laws. In the Matter of Audre Recognition Systems, Inc., Beverly
E. Johnston, and Nick R. Avila, Admin. Proc. No. 3- 9707
(September 17, 1998); SEA Rel. No. 40446; AAE Rel. No. 1076.